Disclosure: Author is short BIDZ
See Part 1: 'Red Flags at Bidz.com'
Citron Research believes the bidding process at Bidz.com leaves a lot of unanswered questions. While Citron does find the Bidz site entertaining with a unique interface, the company has much to prove before it can be anointed with the big earnings multiples associated with proven business models. This report will outline some of the obvious bidding irregularities that we have observed on the Bidz website.
This report will not be a refutation to the conference call and will not address any new issues.
Let us offer one important correction. In the initial report we stated that CEO Zinberg pays himself 30,000 shares per month. This was not correct. He has been selling 30,000 shares per month from his own holdings. Mr. Zinberg stated during the recent conference call that he has reduced that number to 10,000 shares per month; as of today, there has been no public filing of this change yet.
One common complaint that Citron observed in customer postings was shill bidding. This led us to do our own homework. Citron focuses on presenting public domain information. Therefore, when we suggested shill bidding, the investing public ran with the ball and found the same problems on the Bidz website that were found by Citron. As evident in the conference call, investors have already seen these auction items: $6,000 flashlight/TV combo and a $11,000 Television.
The problem is still ongoing as we see in the live auction for a television with an MSRP of $1,499 yet the current bid on the television as of publication is $2,776.
In an informal study, Citron offers the linked table, which outlines not only the obvious irregular bidding above, but also a pattern in the auction of over 30 TVs over more than 3 months. Most of these TVs are bid on hundreds of times by the same three bidders.
What makes this attached spreadsheet so interesting is that all of these televisions were sold by Clear Solution Partners. The owner of Clear Solution Partners is Bidz.com co-founder Matthew Mills. Not only is he the co-founder and vendor of these televisions, he has also been an outspoken proponent of the stock as evident in the Barron’s Blog.
The hundreds of unique bidders over $500,000 for the big yellow diamond ring on BIDZ homepage has now been the topic of much discussion and there is no need to restate those questions. Citron notes that BIDZ itself stated in the conference call that it does not know whether bidders are bona fide until after an auction closes. Therefore, Citron cannot prove that the bidding on any jewelry is fake either. Jewelry is an item that thwarts direct comparison pricing, especially on the internet.
The question that investors are left with: Are the patterns of bidding on the televisions any indication of patterns of bidding on jewelry? Do the hundreds of repetitive bids on the TVs (often by the same bidder on separate auctions at nearly the same second) represent flying fingers of a rogue actor, or a feature of the auction software that only company insiders know about?
Bidz.com is in need of a system that allows for more transparency of the Bidz site and the integrity that comes from unedited consumer feedback within their own site. Citron hopes that Bidz.com views these concerns not as the rantings of a short seller, but rather as issues demanding action in order to maintain trust with its customers and its investors.